Gross margin fell to 27% of sales, down from 33.7% a year earlier, due to an increase in the number of product and shipping promotions during the second half of fiscal 2013.

"We have been concerned that, since the recession began, customers have been conditioned for major price reductions," explained CEO and chairman Thomas Lynch.

"We experienced first hand the difficulty of trying to move away from such promotional activity this quarter when we tested customer tolerance for significantly lower promotional activity.

"While we anticipated a drop in sales, we experienced a larger than anticipated decline in customer traffic at our stores and on our e-commerce site. As a result, we revised this strategy and have returned to higher levels of promotional activity.

"We are now sharing some of the costs of our promotional activities with our vendors, which will help offset some of the costs of the increased promotions."